[Intl-tobacco] BAT in Major Deal with China (Maybe)

[Robert Weissman]

For the element of uncertainty in this gruesome tale, see the last this
group of stories.

British American Tobacco to open factories in China - The Guardian July
18, 2004

British American Tobacco (BAT) is to become the first foreign company to
manufacture cigarettes in China, the home of one in three of the world's sm=
okers.
The London-based firm said on Friday it has signed a deal with a local part=
ner,
China Eastern Investments, to build its biggest plant -- a US$1.5
billion factory
capable of producing 100 billion cigarettes a year. The agreement --
reached after
lengthy negotiations with the government -- is a coup for BAT, which has
a head
start over international rivals seeking to exploit the biggest and
fastest growing
tobacco market on earth. It is also the closest any foreign firm has
come to
breaking the monopoly of China's state-run tobacco companies.

No details have been revealed about the location of the new plant, but cons=
truction
is expected to take at least two years. When running at full capacity,
it will
dwarf BAT's existing 180 factories. Its output is expected to give the comp=
any's
leading brands -- Dunhill, Lucky Strike, Kent and State Express 555 -- a
5 percent
share of China's tobacco sales. At a time when health concerns are shrinkin=
g
markets in developed countries, BAT welcomed its new investment as
potential source
of profits.

"We are committed to China for the long term," BAT's chief executive,
Paul Adams,
said. "For us it represents a major growth opportunity while
contributing to the
Chinese government's excellent efforts to continue developing the
performance of
the country's tobacco industry." Like its rivals, BAT has been selling ciga=
rettes
in China for many years, but with export tariffs as high as 65 percent,
it has been
eager to set up a base for domestic production.

As well as being the most populous nation on earth, China is seen as a
gold mine by
tobacco firms because its poses less risk of lawsuits and imposes fewer adv=
ertising
restrictions. Cigarette packets do carry health warnings but they are vague=
ly
worded and printed in relatively small characters on the sides rather
than the
front. Many municipal ordinances ban sale of cigarettes to minors, but
there is no
national law on juvenile smoking. More than a quarter of China's 1.3 billio=
n
population are smokers. Among adult men, the rate is about 65 percent.
According to
the state-run local media, tobacco firms sold 1.8 trillion cigarettes
last year.
Even with prices as low as US$0.14 a packet, the companies were able to
rack up
profits of US$30 billion last year.

Future business prospects are mixed. The World Health Organization has
warned that
one-third of all Chinese men alive today will die from lung cancer and
tobacco-related illness. Such concerns prompted Beijing to sign up to
the UN
Framework Convention on Tobacco Control, which obliges it to tighten restri=
ctions
on cigarette marketing and consumption. But the government is addicted
to tobacco
income, which accounts for a tenth of its tax revenues. Demand is also
on the rise.
As well as an economic boom that is pushing up wages and prices, the tradit=
ional
reluctance of Chinese women to puff is fading.

July 17, 2004 BAT to build first Western tobacco factory in China
Aaron Woolner
The Independent (UK)

British American Tobacco yesterday announced an expansion in the world's la=
rgest
market for cigarettes after it concluded negotiations with the Chinese cent=
ral
government to become the first Western tobacco company to build a
factory in the
country. Under the joint venture with China Eastern Investments
Corporation, BAT
will invest =A3800m in an attempt to tap into a market where there are appr=
oximately
300 million men and 20 million women hooked on Nicotine.

A company spokesman said the move was a "significant part of the
jigsaw", but there
were still some logistical issues to resolve before the production
target of 100
million cigarettes a year, beginning in 2007, would be reached. BAT sells
cigarettes in China under the State Express 555 brand - the one
apparently favoured
by Chairman Mao - as well as Kent and other less well-known brands. Martin
Broughton, the former chairman of BAT who has been brokering the deal
for the past
three years, said: "I am extremely pleased with the central government's de=
cision
to allow BAT to significantly expand its involvement in China."

Recent years have seen sales in developed countries stagnate but BAT said
yesterday's announcement was the result of a long-held company strategy
to expand
into new markets rather than a reaction to negative developments, such
as the
recent banning of smoking in public places in Ireland and New York. Paul
Adams, its
chief executive, said: "We are committed to China for the long term." He
went on to
praise the Chinese government's "excellent effort" to continue
developing the
country's tobacco industry.

Market sources welcomed yesterday's announcement, saying that BAT's
expertise in
emerging markets made it well placed to exploit growth opportunities in
a country
that consumes a third of the world's cigarette production. Last year,
both Gallaher
and Imperial Tobacco signed distribution deals with local producers but yes=
terday's
move by BAT is the first time a Western firm has been allowed to invest
directly in
the Chinese cigarette market. Shares in BAT closed up 27p to 868p.

China offered concessions to allow foreign firms to invest in the
country during
talks to allow it admission to the World Trade Organisation. BAT has 180 fa=
ctories
in 60 different countries, employing 85,000 staff, including 350 already em=
ployed
in distributing the billion cigarettes the company already sells in
China. It is
estimated that 2 million people die of smoking-related diseases in China ev=
ery
year. Yesterday's news comes as a welcome fillip to a company that last yea=
r
announced a 26 per cent fall in profits as a consequence of
restructuring costs.


UPDATE 3-BAT to build $1.5 billion cigarette plant in China
Fri 16 July, 2004 16:10
By F. Brinley Bruton

LONDON, July 16 (Reuters) - British American Tobacco BATS.L will build a $1=
.5
billion cigarette factory in China with a local partner, it said on
Friday, the
only foreign firm to win such approval in the world's biggest cigarette
market. The
green light comes after years of negotiations with the Communist
government and
gives the world's second-biggest cigarette maker a leg-up on its
competitors. The
maker of Lucky Strike, Kent, Dunhill and Pall Mall cigarettes will work
with China
Eastern Investments Corp. Ltd. to build what will be the UK firm's
biggest factory,
worth around 800 million pounds ($1.5 billion). The new factory will
produce 100
billion cigarettes a year, or about 5 percent of the Chinese market as
it stands,
and more than are consumed in all of Britain.

It will mark BAT's return to China after an exile of over 50 years
triggered by the
Communist revolution in 1949. "We are committed to China for the long
term," said
BAT's chief executive Paul Adams in a statement. "For us it represents a ma=
jor
growth opportunity whilst contributing to the Chinese government's excellen=
t
efforts to continue developing the performance of the country's tobacco ind=
ustry,"
he added. With tobacco companies seeing little growth in the western develo=
ped
market, they have pinned their hopes on China, which smokes about
one-third of the
world's cigarettes and last year began to give foreign firms access.

The Chinese puff through about 1.8 trillion cigarettes a year. More than
60 percent
of men over the age of 15 smoke, health officials estimate. The World Healt=
h
Organisation estimates that smoking kills 1 million Chinese annually,
mostly men.
If the current smoking patterns there continue, 3 million people will
die annually
by 2050, with one-third of all Chinese young men alive today dying from tob=
acco
use, according to the WHO's website www.who.org.

The WHO added there are over 320 million smokers in China, and three
million join
them every year. BAT built a large market in China during the first half
of the
20th century and in 1937, it had 67 percent of the market in China and oper=
ations
in the country accounted for nearly 40 percent of volumes. But BAT,
which was
created in 1902 by rival tobacco companies American Tobacco and Imperial To=
bacco,
lost its holdings in China after the Communist Revolution in 1949.

MAJOR PUFFERS

JP Morgan analyst Michael Smith lauded BAT's move. "We believe the
investment in
China justifies multiple expansion by transforming the group into the world=
's
largest, most international, and fastest growing tobacco company," he
said in an
analyst note. He said he estimated the market has a sales value of about $9
billion. BAT's plans dwarf similar moves by competitors, and its shares
jumped 3.1
percent to 867 pence by 1509 GMT. Late last year, Britain's Gallaher
Group Plc
GLH.L signed a deal with China's Shanghai Tobacco Corp. to make and
distribute one
of its brands, then earlier this year the UK's Imperial Tobacco Group
Plc IMT.L
struck a similar type of deal with Chinese tobacco giant Hongta. China
last year
began moving to overhaul the fractured industry ahead of a gradual
opening up.

The government decided last year to abolish special retail licences for ove=
rseas
cigarettes -- a small but welcome step in a market that has long
thwarted foreign
access but according to state media racked up about $30 billion in
profits last
year. Officials in Beijing have also said they want to create several natio=
nal
giants, closing about half the country's 146 factories, while relaxing rest=
rictions
on sale of foreign brands. The location of the plant, which will make
BAT's State
Express 555 and Kent as well as other brands, is yet to be finalised.

July 16, 2004
ANALYSIS
Big Tobacco's big hope
Patience may prove a highly profitable virtue for BAT, which has at last
sealed a
deal to manufacture cigarettes in China.
By Mike Verdin

The Chinese gave the world the abacus, spaghetti, paper and silk. Its
printers were
handling moveable type three centuries before Gutenberg's inky fingers
revolutionised Europe. So how does the West respond? By, a millennium
after Chinese
sailors became the first to navigate with the help of a compass, shipping
investment wholesale into the country's sin industries. Anheuser Busch
and Scottish
& Newcastle are among brewers to have signed partnerships with Chinese
peers this
year. Today British American Tobacco joined the clutch of cigarette compani=
es
targeting Chinese smokers. If anti-tobacco campaigners had thought they
had the
industry on the run, with New York and Ireland introducing smoking bans and
advertising curbs strengthened in Europe, they reckoned without help
from the
world's biggest cigarette market.

About 1.78 trillion cigarettes are sold in China each year, a third of glob=
al
consumption. Yet until China was forced to offer concessions as it negotiat=
ed
membership of the World Trade Organisation, the market was largely off
limits to
foreign companies. State Express 555, made by BAT, may have been the favour=
ite
brand of Chairman Mao (and indeed of Ho Chi Minh, the former Vietnamese
leader) but
some smokers, it appears, were more equal than others. Even now restriction=
s
remain. Still, with 1.78 billion cigarettes a year at stake, even a 1
per cent
market share would be worth having. What BAT's deal, involving tie-up
with China
Eastern Investments Corporation, allows is a share of at least 5 per
cent should a
factory which the agreement will create reach full manufacturing
capacity of 100
billion cigarettes a year.

BAT's grip on the market could be even greater once imports, which were not
mentioned in this morning's announcement, are included. BAT has for two yea=
rs
shipped to China in earnest, with imports reaching more than 1 billion ciga=
rettes
last year. Gallaher's launch in May of locally made Memphis cigarettes,
with sales
expected to reach 100 million sticks a year, appears but a low tar
initiative in
comparison.

Which is why BAT has been prepared to wait so long to seal a deal of such
significance. The company thee years ago announced it had signed an underst=
anding
with state-owned China National Tobacco only for comprehension to be
lost among a
maze of Chinese walls. Martin Broughton, who retired at the end of last
month as
the BAT chairman, said in February that his greatest regret after a
decade in
charge was not to have secured a Chinese foothold. He was viewed as so inst=
rumental
to today's deal that BAT hauled him back for a quote on its press
release, which
went without mention of Jan du Plessis, Mr Broughton's successor. Mr Brough=
ton
receives a glorious encore. Mr du Plessis is lumbered with ultimate
oversight of a
deal which will yet require considerable work to realise its potential. Eve=
n
Shanghai has introduced curbs on tobacco advertising while, to the
frustration of
Western executives, the country which invented paper retains a love of
shuffling it
around.

Still, Mr Broughton should enjoy his applause. It may be short lived.
Next week he
becomes the chairman of British Airways, an airline, which after a remarkab=
le
turnaround, faces a new set of challenges such as high oil prices and indus=
trial
unrest. While BAT was enjoying analyst plaudits this morning, BA was
facing the
threat of industrial unrest from 8,000 baggage handlers and check-in
staff. "Our
members have delivered their part of the BA bargain," the Transport and Gen=
eral
Workers Union said. "Now it's time for BA to repay that commitment."

This is one understanding which, it appears, will not wait three years
to bear
fruit.



China denies approving BAT's US$1.5b tobacco deal: report - Channel
NewsAsia - AFP
July 21, 2004

Shanghai: Chinese authorities have denied British American Tobacco has
won a
deal to set up a 1.5 billion dollar cigarette manufacturing joint venture.
"We did not approve the project and we are surprised to hear the report,"
the official China Daily quoted Wei Xinhua, deputy director of the General
Office of the State Tobacco Monopoly Administration (STMA), as saying.

"I am wondering why BAT (British American Tobacco) said the Chinese
government had approved the project," Wei said, adding that officials would
release a detailed statement on the proposed deal Thursday. Last Friday
BAT, the world's second largest cigarette manufacturer, said Beijing had
approved its proposal to form a joint venture with China Eastern Investment=
s
Corp.

"We are committed to China for the long term," BAT's chief executive Paul
Adams said in a statement. "For us it represents a major growth opportunity
whilst contributing to the Chinese government's excellent efforts to
continue developing the performance of the country's tobacco industry."

In China, BAT's subsidiary reiterated that approval had come from the
highest authorities in Beijing. "The approval comes from the central
government," the daily quoted British American Eastern as saying.

If BAT has indeed won government approval it would be the first foreign
tobacco company to gain the much-coveted right to build a factory in China,
which accounts for nearly one-third of the world's 1.3 billion smokers.

The deal with China Eastern Investments would set up a factory able to
produce as many as 100 billion cigarettes a year as well as domestically
distributing BAT brands such as Lucky Strike and State Express 555.

With 350 million smokers and annual sales of around 1.8 trillion cigarettes=
,
China is the largest tobacco market in the world.

Although China is opening up domestic distribution channels in line with
World Trade Organisation mandated regulations, overseas investment
opportunities remain limited, with joint ventures supposedly banned by
Beijing.

Under current laws the tobacco administration must approve the establishmen=
t
of a new cigarette factory, and, the newspaper said, this seems unlikely in
the short-term.

STMA official Hu Xinhua said that it would not approve any more cigarette
factories as existing manufacturing capacity already exceeded demand.